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The Actuary The magazine of the Institute & Faculty of Actuaries

Challenge of fair value

The Casualty Actuarial Society recently published studies on the application of fair value accounting concepts to property and casualty insurance. The work included application of expected fair value techniques to regulatory return data over several years. The principal conclusions were:

  • On reliability, there was some scepticism as to whether fair valuation of liabilities would be a significant progressive advance as compared with US GAAP. This is because reserving is inevitably a highly judgemental process with considerable potential for error. Even a ‘best estimate’ reserve for any particular risk class will not necessarily be a good estimate.
  • On relevance, the study takes a more positive view that the effort to recognise true economic value creation or destruction deserves to be pursued despite the obvious difficulties. ‘Many believe that a closer correspondence between economic performance and financial reporting will improve decision-making, by removing incentives to manage towards accounting income rather than economic value creation’, the study notes.
  • Finally, on cost, a substantial investment in systems and staff training is likely to be required. As is expected in life assurance, the overall effect moving to fair value based accounting on actuaries’ employment prospects is expected to be very positive!

Find out more at www.casact.org/pubs/fairvalue/.